What is Needed to Qualify for a Home Loan?
Qualifying for a home loan is something you need to think about well before you begin to shop for a new home. The last thing you want is to locate your dream home only to find out that your financial or credit situation is making it difficult to qualify for the loan. Here is what you need to know to be fully prepared. Click here to learn five tips to get approved for a home loan.
Credit scores are the common theme regardless as to which loan program you ultimately decide to go with. Your credit scores may impact your down payment, the interest rate, or even whether you get approved for the loan. Credit is something you need to be thinking about and working on all of the time. If you wait until you are shopping for a home, then it is too late to make improvements.
Some basic tips about managing your credit when preparing to buy a home are as follows:
- Do not make any late payments even if it is a small amount.
- Reduce your credit card debt on the cards that have the largest minimum monthly payment requirements.
- Make sure that your credit card balances are less than 30% of the credit limit on the cards. If you cannot pay own the balances below 30%, then call the credit card company and ask them to increase your credit limit. This will essentially accomplish the same thing.
- Click to read more about how to improve your credit score.
- You will need a two year work history with no gaps in employment.
- If you are self-employed, you will need to prove that you own a business and that it has been operational for at least two years.
You will need to provide 2-3 months of bank statements where the lender will take the average balance. If you have any large and unusual deposits they will need to be explained. Make sure that you have your down payment funds in the account months before you apply for the loan. You will have to provide copies of and brokerage accounts, 401k, etc
Lenders will require you to provide at least 1-2 months of pay stubs and the last two years W2s and tax returns.
Your down payment requirements will vary by program and also based upon your credit scores and whether you have a bankruptcy or foreclosure in your past. I will detail the down payment requirements in the common loan programs referenced below.
Common Orlando Home Loan Programs and What is Required to Qualify
Conventional Fixed and Adjustable Rate Loan Program Requirements
- As little as 5% down but will require private mortgage insurance for anything less than 20% down
- Credit Scores of 620 (depending upon lender) or higher
- Full documentation of income with a maximum debt to equity ratio of 43%
- 3.5% down (10% down for credit scores below 580)
- Credit scores as low as 550
- Gift funds from a relative to cover down payment or closing costs are permitted
- Higher debt to equity levels permitted which means it is easier to qualify
VA Home Loan
- You must be an active or retired veteran (or in the reserves)
- 100% financing – no down payment required
- Credit scores as low as 620 and sometimes below
- No mortgage insurance
- Additional documentation required from the military
- This program is for homes located in USDA approved rural areas.
- 100% financing – no down payment required
- Credit scores as low as 620
Many home buyers are self-employed and as business owners, they are taking many legitimate tax deductions. What this means is that their tax returns often show a very low net income making it difficult to qualify for a home loan. Immediately after 2008, all of the programs that helped self-employed individuals went away. However, now there are a few programs available which can help business owners buy a home or even refinance an existing home. The most recent loan product is called a Bank Statement Loan. Lenders will require you to provide 1-2 years’ worth of bank statements showing steady deposits. The idea is that these deposits essentially prove that you have sufficient funds coming in to qualify for the loan. The bank statements can be business, personal, or both. Here are the requirements for this great loan program:
- You must be self-employed for a minimum of two years
- You must provide 12-24 months of bank statements
- You must document all other liquid assets
- 10%-20% down depending upon the lender
- Credit scores no lower than 680, otherwise the down payment requirement may be higher
Hopefully this gives you an idea as to what you can expect when it comes to qualifying for a home loan. With careful planning and good credit, I am confident that you will have no trouble financing your next home. Contact me at 407-906-9135 if you are ready to start shopping for a home in the Orlando area or if you would like recommendations for local mortgage lenders.